583_1972_Weston Bourret to E. C. Douglas

Mexico 20 December 1972
E. C. DeMoss cc A. M. Wilson (2)
Hugh Douglas
Weston Bourret
RECENT ECONOMIC TRENDS - MEXICO
According to the Financial Times reports and speeches of informed officials, Mexico is presently witnessing a disturbing trend with respect to major mining investments.
A few items bearing on this subject:
1. According to U. S. Ambassador Robert McBride, the trend of foreign investment policy is not all rosey and an upsurge in economic nationalism has provoked fears among mining investors. Mr. William Spencer, President of The First National City Bank of New York said last month ""Foreign investors are worried about the growing tendency of the Echeverria policies.""
2. The policy of Mexico, which began to gather force in the 1960s and has now been given new impetus by the Echeverria Administration, has improved the picture for the Mexico City Stock Exchange. The reason of course being that many foreign companies have suddenly found themselves obliged to sell up to 60 percent of equity to Mexican nationals. Invariably, they turn to the Mexican Stock Exchange to do so and naturally the effect is depressing on price of shares and P. E. multiple.
3. The Minister of National Patrimony, Sr. Florez de la Pena, in a recent blast told Congress ""Foreign investors who want to come to Mexico can come as partners, but we cannot allow them to convert Mexico into a land of maids and waiters.""
4. Of the three big mining companies, namely, Asarco Mexicana, Minera Frisco and Industrias Penoles, all suffered a sharp fall in profits in 1971 - partly of course due to lower metal prices. Minera Frisco profits declined by more
than 50 percent compared to 1971.
5. In the past two years the government has bought out several important foreign companies. Simultaneously, the government has established new and stricter rules for foreign investors. Presently a bill is in Congress to control the importation of technology; and a second bill is now being drafted to cover the whole field of foreign investment including mining.
Apparently, President Echeverria feels comfortable enough in his third year
of power to challenge the private sector and his so called ""smothering"" influence
of the United States.
6. The Latin American Review for November 10, 1972 carried the attabbed editorial on Mexico entitled ""Mexico: rules of the game."" After reading this editorial
it appears that our Ambassador McBride is on the ball in inquiring as to what extent the rules of the game have really been changed.
It is my thought that we continue to monitor developments related to Asarco Mexicana's LaCaridad copper mine and smelter. Rumors are that this proposition is not bankable in its present form as presented to the Consortium of Banks. We shall attempt to closely follow this situation as a ""bellweather"" of the government's attitude toward major mining investments. In the meantime, I suggest we talk to our U. S. Ambassador; the President of Asarco Mexicana, one or two bankers and the Minister of Finance, Sr. Pena before making any dollar committment on the acquisition of a mining concession in Mexico.
Weston Bourret
Attachment
tenure. In Ecuador, 45 per cent of agricultural land is owned by 0.4 percent of the rural population, and 81.7 per cent o the farms are less than 5 hectares in area. The government's promise to respect 'productive' private land holdings probably means few or no expropriations of farms owned by rich Ecuadoreans.
Mexico: rules of the game
The government is beginning to change the rules of foreign investment without actually re-writing them. The first change concerns foreign know-how.
By sending a bill to congress last week regulating the import of foreign technology, President Luis Echeverra took the first overt step towards estab-lishing stricter control over the use of foreign capital. The question of foreign know-how is by no means the major issue in Mexican minds over how to deal with investment from abroad, but it has been a painful thorn in their flesh for some time. Their complaint is that many foreign com-panies have charged their Mexican clients, asso-ciates or subsidiaries 'outrageous' sums for royalties, licences, patents, trade marks and tech-nical know-how generally. This technology is often outdated, or not needed, or excessively expensive, or unsuited to Mexican conditions. As regards subsidiaries of foreign companies, many are alleged to have preferred to pay for some indeter-minate know-how to their parent concern and deduct 23 per cent from the payment as federal tax, rather than retain the money in Mexico and pay a larger proportion out as corporation tax, compulsory profit sharing and so on. An added refinement, the indictment goes on, is that some subsidiaries pay for know-how to 'ghost' com-panies in Lichtenstein or Panama, so enabling the parent concerns to evade tax at home.
All this is now to be stopped. Under the new bill, which is virtually certain to be approved in roughly its present form, any contract with a foreign firm which involves a Mexican company paying for any form of know-how or technological rights, must be registered with the ministry of trade and industry. If registration were refused, it would invalidate the agreement. This would give the government the same kind of wide discretionary powers to regulate the import of foreign tech-nology, as it already has in respect of goods and capital. Many foreign businessmen have for years complained that the existence of these powers, and the way they are exercized, leave them uncertain about what rules of the game really are. But this
358
is just what suits the Mexicans, who are nothing if not flex in the practice of government. For this reason the rules are unlikely to be re-written, even though they are to be applied more strictly.
The signs of this have been legion of late. Even Echeverra himself has inveighed against the ten-dency of some foreign investors to buy up cheaply Mexican firms in difficulties, instead of investing to create new businesses and jobs. The driving force behind the campaign against the kind of investment the government does not want has come from Jos Campillo Sainz, deputy minister for trade and industry, who appears to have got his ideas accepted by the President. Indeed some reports have suggested that Campillo Sainz, who became disillusioned about the 'outrageous' pay-ments for know-how to United States firms when he was legal advisor to the private steel concern Fundidora of Monterrey, may replace the minister, Carlos Torres Manzo, in the foreseeable future.
It was in fact Campillo Sainz who last month unleashed a somewhat acid exchange with the United States ambassador, Robert McBride, over the treatment of foreign investors. After the deputy minister had spoken on the subject to the Mexican-United States businessmen's committee, setting out the government's official view, the ambassador asked if the rules of the game had in effect been changed, and was told they had. McBride then complained that United States investors did not know for certain whether they were wanted or not, and found it very difficult to operate when the rules of the game were liable to be changed during play. These remarks caused a veritable deluge of protest from the Mexican press, and even the foreign minister, Emilio Rabasa, commented drily that the United States itself had changed the rules of the game by imposing a 10 per cent import surcharge during the dollar crisis last year, without warning to any of the players 1 Rabasa pointed out that all countries change the rules when they feel their vital interests to be affected.
The fact remains that Mexico still wants foreign investment, and foreign know-how. But from now on it will be much more difficult for foreign investors, either new or long-established, to get away with bending the rules to the advantage of their profits. High profits will still be held out as an inducement, but only in areas where the Mexicans really want the investment to go. And in fact many of those 'old hands' who did bend the rules are probably resigned to seeing an end to the excellent run they have had for their money. This time there is unlikely to be any sudden panic withdrawal or withholding of private investment that occurred 12 years ago when the late President Adolfo Lpez Mateos announced that his government was 'extreme left within the constitution'.
LATIN AMERICA, 10 November 1972

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Mexico 20 December 1972
E. C. DeMoss cc A. M. Wilson (2)
Hugh Douglas
Weston Bourret
RECENT ECONOMIC TRENDS - MEXICO
According to the Financial Times reports and speeches of informed officials, Mexico is presently witnessing a disturbing trend with respect to major mining investments.
A few items bearing on this subject:
1. According to U. S. Ambassador Robert McBride, the trend of foreign investment policy is not all rosey and an upsurge in economic nationalism has provoked fears among mining investors. Mr. William Spencer, President of The First National City Bank of New York said last month ""Foreign investors are worried about the growing tendency of the Echeverria policies.""
2. The policy of Mexico, which began to gather force in the 1960s and has now been given new impetus by the Echeverria Administration, has improved the picture for the Mexico City Stock Exchange. The reason of course being that many foreign companies have suddenly found themselves obliged to sell up to 60 percent of equity to Mexican nationals. Invariably, they turn to the Mexican Stock Exchange to do so and naturally the effect is depressing on price of shares and P. E. multiple.
3. The Minister of National Patrimony, Sr. Florez de la Pena, in a recent blast told Congress ""Foreign investors who want to come to Mexico can come as partners, but we cannot allow them to convert Mexico into a land of maids and waiters.""
4. Of the three big mining companies, namely, Asarco Mexicana, Minera Frisco and Industrias Penoles, all suffered a sharp fall in profits in 1971 - partly of course due to lower metal prices. Minera Frisco profits declined by more
than 50 percent compared to 1971.
5. In the past two years the government has bought out several important foreign companies. Simultaneously, the government has established new and stricter rules for foreign investors. Presently a bill is in Congress to control the importation of technology; and a second bill is now being drafted to cover the whole field of foreign investment including mining.
Apparently, President Echeverria feels comfortable enough in his third year
of power to challenge the private sector and his so called ""smothering"" influence
of the United States.
6. The Latin American Review for November 10, 1972 carried the attabbed editorial on Mexico entitled ""Mexico: rules of the game."" After reading this editorial
it appears that our Ambassador McBride is on the ball in inquiring as to what extent the rules of the game have really been changed.
It is my thought that we continue to monitor developments related to Asarco Mexicana's LaCaridad copper mine and smelter. Rumors are that this proposition is not bankable in its present form as presented to the Consortium of Banks. We shall attempt to closely follow this situation as a ""bellweather"" of the government's attitude toward major mining investments. In the meantime, I suggest we talk to our U. S. Ambassador; the President of Asarco Mexicana, one or two bankers and the Minister of Finance, Sr. Pena before making any dollar committment on the acquisition of a mining concession in Mexico.
Weston Bourret
Attachment
tenure. In Ecuador, 45 per cent of agricultural land is owned by 0.4 percent of the rural population, and 81.7 per cent o the farms are less than 5 hectares in area. The government's promise to respect 'productive' private land holdings probably means few or no expropriations of farms owned by rich Ecuadoreans.
Mexico: rules of the game
The government is beginning to change the rules of foreign investment without actually re-writing them. The first change concerns foreign know-how.
By sending a bill to congress last week regulating the import of foreign technology, President Luis Echeverra took the first overt step towards estab-lishing stricter control over the use of foreign capital. The question of foreign know-how is by no means the major issue in Mexican minds over how to deal with investment from abroad, but it has been a painful thorn in their flesh for some time. Their complaint is that many foreign com-panies have charged their Mexican clients, asso-ciates or subsidiaries 'outrageous' sums for royalties, licences, patents, trade marks and tech-nical know-how generally. This technology is often outdated, or not needed, or excessively expensive, or unsuited to Mexican conditions. As regards subsidiaries of foreign companies, many are alleged to have preferred to pay for some indeter-minate know-how to their parent concern and deduct 23 per cent from the payment as federal tax, rather than retain the money in Mexico and pay a larger proportion out as corporation tax, compulsory profit sharing and so on. An added refinement, the indictment goes on, is that some subsidiaries pay for know-how to 'ghost' com-panies in Lichtenstein or Panama, so enabling the parent concerns to evade tax at home.
All this is now to be stopped. Under the new bill, which is virtually certain to be approved in roughly its present form, any contract with a foreign firm which involves a Mexican company paying for any form of know-how or technological rights, must be registered with the ministry of trade and industry. If registration were refused, it would invalidate the agreement. This would give the government the same kind of wide discretionary powers to regulate the import of foreign tech-nology, as it already has in respect of goods and capital. Many foreign businessmen have for years complained that the existence of these powers, and the way they are exercized, leave them uncertain about what rules of the game really are. But this
358
is just what suits the Mexicans, who are nothing if not flex in the practice of government. For this reason the rules are unlikely to be re-written, even though they are to be applied more strictly.
The signs of this have been legion of late. Even Echeverra himself has inveighed against the ten-dency of some foreign investors to buy up cheaply Mexican firms in difficulties, instead of investing to create new businesses and jobs. The driving force behind the campaign against the kind of investment the government does not want has come from Jos Campillo Sainz, deputy minister for trade and industry, who appears to have got his ideas accepted by the President. Indeed some reports have suggested that Campillo Sainz, who became disillusioned about the 'outrageous' pay-ments for know-how to United States firms when he was legal advisor to the private steel concern Fundidora of Monterrey, may replace the minister, Carlos Torres Manzo, in the foreseeable future.
It was in fact Campillo Sainz who last month unleashed a somewhat acid exchange with the United States ambassador, Robert McBride, over the treatment of foreign investors. After the deputy minister had spoken on the subject to the Mexican-United States businessmen's committee, setting out the government's official view, the ambassador asked if the rules of the game had in effect been changed, and was told they had. McBride then complained that United States investors did not know for certain whether they were wanted or not, and found it very difficult to operate when the rules of the game were liable to be changed during play. These remarks caused a veritable deluge of protest from the Mexican press, and even the foreign minister, Emilio Rabasa, commented drily that the United States itself had changed the rules of the game by imposing a 10 per cent import surcharge during the dollar crisis last year, without warning to any of the players 1 Rabasa pointed out that all countries change the rules when they feel their vital interests to be affected.
The fact remains that Mexico still wants foreign investment, and foreign know-how. But from now on it will be much more difficult for foreign investors, either new or long-established, to get away with bending the rules to the advantage of their profits. High profits will still be held out as an inducement, but only in areas where the Mexicans really want the investment to go. And in fact many of those 'old hands' who did bend the rules are probably resigned to seeing an end to the excellent run they have had for their money. This time there is unlikely to be any sudden panic withdrawal or withholding of private investment that occurred 12 years ago when the late President Adolfo Lpez Mateos announced that his government was 'extreme left within the constitution'.
LATIN AMERICA, 10 November 1972